Like all great long-term picks, patience with the Invesco Powershares Water Resources ETF (NASDAQ:PHO) has finally paid off. It’s been one of the best exchange-trade funds to own in 2019 thus far, up 24.3% versus the 17.1% gain logged by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) since the end of 2018. It’s also nearly doubled-up the S&P 500’s net gain since the beginning of 2018, when the best ETFs contest began.
Yes, water. It’s the trade nobody saw coming.
The few ETF fans that took a swing on such an obscure opportunity — the underlying fund manages less than a billion dollars’ worth of assets — can largely thank its two top holdings, Danaher (NYSE:DHR) and Roper Technologies (NYSE:ROP) for the serious outperformance. Danaher is up nearly 40% this year, effectively buoyed before and after what was a solid first quarter print, and bolstered by the impending acquisition of the General Electric (NYSE:GE) biopharma unit. Roper isn’t far behind Danaher, fueled by an equally impressive quarterly report.
The underpinnings for the strength, however, are still the same ones I laid out a year and a half ago. They just finally got the nudge from renewed U.S. industrialism few investors are willing to concede is taking shape.
Why PHO Is One of the Best ETFs
The short version of a long story: America’s entire water-management system is a mess.
The statistics are shocking, not to mention a little embarrassing. Every day, the nation’s leaky (literally) water infrastructure loses 6 billion gallons of treatable, potable water. That’s more than two trillion gallons of wasted water per year. Much of that loss stems from the 240,000 or so breaks in water mains that take place every year before that water even makes it past the meter, though the pipes in homes are in no better shape. Household leaks alone can collectively waste an estimated trillion gallons of water per year.
It’s Bigger Than Flint
One only has to look at the Flint, Michigan debacle to realize the full scope of the problem; countless other cities are dangerously close to becoming the next Flint.
Then there’s the water wasted not through leaks, but by inefficient appliances like washing machines and dishwashers.
For years … decades even, it didn’t matter. Water was abundant, cheap and relatively easy to treat. As the population has grown and the climate has changed, though, so too has accessibility. Some the country’s biggest and most-established cities — Los Angeles and Miami, for example — are running out of water as natural, treatable sources of it are literally and figuratively drying up.
Money alone won’t fix the problem, but money is a good start to a fix. The American Water Works Association estimates $1 trillion will be needed over the next couple of decades to shore up the country’s water woes, a figure that likely understates how much will be spent when all is said and done.
Most of the components of the Invesco Powershares Water Resources ETF are well-positioned to capture more than their fair share of that spending.
Take Xylem (NYSE:XYL) as an example, arguably the best pure-play example of the ETF’s components and its seventh largest, at 4.15% weighting. From agricultural irrigation to utility-scale treatment to commercial buildings, Xylem offers real solutions that reduce the usage of water, and improve the efficiency of treating it.
Xylem has legitimately graduated to the title of being a “smart water” company too, combining old and proven ideas with technology in a way that should be taken shape years ago.
Down the Road With Water ETF
It’s admittedly an atypical pick for me, and most other investors. Most company-specific investments are rooted in a particular product’s potential, and most ETF investments are an effort to tap into a cyclical move. A position in the Invesco Powershares Water Resources ETF is mostly a philosophical one, and all but requires a willingness to stick with it for years. A forever mindset somehow doesn’t feel wrong in this particular case.
It’s also a pick that requires some leeway. While all of the 36 names that make up the fund have some sort of exposure to the water-management market, few of them are the pure-plays that ETF fans typically prefer. For several companies that make up the fund, water is a minor part of the business mix.
Nevertheless, it’s a mindset and leeway that are starting to pay off.
While PHO will certainly ebb and flow going forward, the ebbs are hurting a little less than they do the broad market, and the flows are helping a little more.
As of this writing, James Brumley held no position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
